Christopher Browne, the former head of Tweedy Browne (Trades, Portfolio), was a dedicated and renowned value investor. To explain his ideas and philosophy, he wrote “The Little Book of Value Investing,” which was published in 2006.
During his career, he worked alongside some of the giants, including Bill Tweedy, who founded the original firm in 1920. In 1945, Tweedy partnered with Howard Browne (the author's father) and Joe Reilly to form Tweedy, Browne and Reilly.
One of the firm’s earliest clients was Benjamin Graham; Tweedy took an office just down the hall from Graham in hopes of getting a larger share of his business. Walter Schloss, another legendary investor, moved into Tweedy, Browne offices in New York, where he had a desk in a hallway. Schloss introduced them to Warren Buffett (Trades, Portfolio) and the firm developed close ties with him, too. The author wrote, “Tweedy, Browne had the advantage of being broker to three of the most outstanding investors in history: Benjamin Graham, Walter Schloss, and Warren Buffett. No wonder we are committed value investors.”
Browne died in 2009 at age 63, a life-long employee, owner and manager of Tweedy Browne.
Browne began his book by explaining the underpinnings of the value investment philosophy. He used the analogy of buying steaks at the supermarket. When steaks that normally sell for $8.99 go on sale for $2.50 per pound, you fill up your shopping cart.
But when they spike to $12.99, you head for the chicken or pork section. He wrote, “Most people tend to look at pretty much everything they buy with an eye on the value they get for the price they pay. When prices drop, they buy more of the things they want and need. Except in the stock market.”
Why don’t investors look at price and value the same way in the stock market? It’s because of the excitement of rapidly rising stocks, as well as the fear of missing out. The emotions of greed are reinforced by the attention given to hot stocks in media reports and even talk at cocktail parties. Once prices begin to fall, fear kicks in and investors sell at exactly the wrong time. It’s the opposite of the way they behave in the supermarket. “Everyone seems to think that they should buy stocks that are rising and sell those that are falling,” Browne wrote.
Some investors have tried to make a “science” of buying and selling hot stocks (also known as “growth” stocks). These are exciting stocks that everyone wants to own right now. There is some validity to this strategy because the companies making such heights are strong players within their industry groups and innovators. But Browne issued a caveat:
“There is nothing wrong with owning great businesses that can grow at fast rates. The fault in this approach lies in the price that investors pay. Nothing grows at super high rates forever. Eventually, hypergrowth slows. In the interim, investors have often bid the prices of these hot, glamour stocks up to unsustainable heights. When growth rates decline, the result can be injurious to the investor’s financial well-being.”
To further make the case that value stocks outperform growth stocks, Browne turned to research done by Morningstar, writing, “Over the past five years [before 2006], value funds have outperformed growth funds by 4.87 percent annually compounded. This is remarkable when you consider that the press frequently hails professional investors who beat the markets by a penny or two.”
Is the outperformance of value funds a lucky accident, as the proponents of the efficient market hypothesis might argue? As you may recall, this theory claims there are no “cheap” or “expensive” stocks—everything is correctly priced because every investor has access to the same information about them, all the time.
Among those challenging the hypothesis was Buffett. On the 50th anniversary of the publication of Graham’s “Security Analysis” in 1984, he made a now-famous speech titled “The Super Investors of Graham and Doddsville.”
According to Buffett, the seven most successful investors of all time came from one investing “school.” All were committed to value investing, based on the principles set out by Graham. Some of the seven had taken classes from Graham or worked for him. Whatever their backgrounds and whatever their operational approaches, “they all had a common intellectual grounding, and they believed in the basic concept of value investing—buying a business for far less than it is worth.”
Browne added that Buffett’s assertions were backed up by “rigorous academic studies of value investing versus growth, or as some call it, 'glamour investing.'” He added, “From 1968 to 2004, value portfolio characteristics produced superior returns. In many cases, the degree of outperformance in these studies was several percentage points greater.”
Further, even small incremental gains have a major impact on an investor’s net worth over time. For example, a $10,000 portfolio compounded at 8% for 30 years would grow to more than $100,000. But the same amount compounded at 11% over the same period would deliver nearly $229,000.
Summing up, Browne wrote, “Just as it makes sense to buy steaks, cars, and jeans on sale, it makes sense to buy stocks on sale, too. Stocks on sale will give you more value in return for your dollars.”
Read more here:
- Indexing for Dummies: Boring but Rewarding
- Indexing for Dummies: Diversify With Alternative Indexes
- Indexing for Dummies: An Introduction to Bond Index Funds
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